Mass Layoffs Breed Office Sublease Space

Look for a steady climb in sublease space next year as the recession hits the nation’s office market in a big way. That is a major prediction made by several third-quarter reports on the national office market released last week. The studies coincided with new estimates placing job losses in the financial sector alone at more than 200,000 by the end of the year. Such reductions may take many quarters to show up in vacancy figures, given the lead time required for tenants to assess their space needs, shrink the work force and vacate space. Sublease space increased in three quarters of the office markets tracked by Jones Lang LaSallle Inc. “Given the speed at which the financial crisis has impacted companies, and the uncertainty surrounding the size, shape and duration of this downturn, most (tenants) have simply not adjusted space needs yet,” said the firm’s third-quarter office market report. “We therefore expect sublease space to increase more dramatically in the coming quarters but peak below the levels seen the dot com bust earlier in the decade.” Available sublease space increased 4 percent nationwide during the third quarter alone and shot up 13.4 percent year-over-year compared to the third quarter of 2007, according to Colliers International’s third-quarter office report. “This trend of companies subleasing their office space points toward economic weakness and can also be viewed as a negative harbinger of lease rates,” the report noted. Still, the 65.7 million square feet available for sublease is less than half the 142.9 million square feet that was on the market in the third quarter of 2002, the year following the terrorist attacks on New York City and Washington, D.C. More than a dozen office markets experienced an uptick in sublease space of more than 50 percent compared to third-quarter 2007 results, Colliers found. Leading the list are Miami/Dade County, Fla., (up 218 percent), Baltimore (182.4 percent); Greenville, S.C. (170.3 percent), West Palm Beach/Palm Beach County, Fla. (154.6 percent); Boise (153.8 percent), Downtown Manhattan (114.4 percent), and Portland, Ore. (93.5 percent). Nationwide, sublease space is also taking a bigger share of vacancy. Real estate services firm CB Richard Ellis Inc. estimated that sublease space accounted for 11.2 percent of all vacant space, an increase from 10.9 percent from the second quarter. The firms offer varying estimates of vacancy, but last week’s reports all detect a significant increase. Vacancy for the entire U.S. market is up to 14.1 percent, a 90 basis-point jump since the beginning of the year, according to CB Richard Ellis. That is lower than the 14.6 percent vacancy rate reported by Jones Lang LaSalle but slightly higher than the 13.7 percent determined by Colliers